MSR Resort Golf Course LLC and MS Resorts Liquidating Trustee, LLC as Liquidating

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
.
. Chapter 11
IN RE: 	.
. Case No. 11-10372 (SHL)
MSR RESORT GOLF COURSE, LLC, 	.
et al, 	. New York, New York
. Tuesday, July 31, 2012
Debtors. 	. 4:09 p.m.
. . . . . . . . . . . . . . . .
BENCH RULING RE: TRIAL ON MOTION OF MSR RESORT GOLF COURSE,
LLC, ET AL, FOR ENTRY OF AN ORDER ESTIMATING DAMAGES
RESULTING FROM REJECTION OF THE HILTON MANAGEMENT AGREEMENTS
AND AN ORDER AUTHORIZING REJECTION OF THE HILTON MANAGEMENT
AGREEMENTS
BEFORE THE HONORABLE SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For the Debtors: 	Chad J. Husnick, Esq.
KIRKLAND & ELLIS, LLP
300 North LaSalle
Chicago, Illinois 60654
Atif Khawaja, Esq.
Eric F. Leon, Esq.
KIRKLAND & ELLIS, LLP
601 Lexington Avenue
New York, New York 10022
(Appearances Continued)
Audio Operator: 	Electronically Recorded
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AudioEdge Transcription, LLC
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Proceedings recorded by electronic sound recording,
transcript produced by certified transcription service.
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APPEARANCES: 	(Continued)
For GIC RE: 	Brian E. Greer, Esq.
DECHERT, LLP
1095 Avenue of the Americas
New York, New York 10036
Also Appearing: 	Michelle J. Vladimirsky, Esq.
KASOWITZ, BENSON, TORRES
& FRIEDMAN, LLP
1633 Broadway
New York, New York 10019
APPEARANCES VIA TELEPHONE:
For Waldorf=Astoria
Management, LLC: 	David M. Neff, Esq.
Brian Audette, Esq.
PERKINS COIE, LLP
131 S. Dearborn Street, Suite 1700
Chicago, Illinois 60603
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(Proceedings commence at 4:09 p.m.)	1
THE COURT: 	Good afternoon.	2
MR. LEON: 	Good afternoon, Your Honor.	3
THE COURT: 	All right. 	We are here this afternoon for	4
the purpose of reading a bench decision in the estimation trial	5
that we had earlier this month.	6
And I will apologize for subjecting to you all to a	7
lengthy, dramatic reading. 	As we discussed, my preference	8
probably would have been to prepare a written opinion in a case	9
like this, but timing is sensitive in this case; I want to get	10
the parties a decision quickly.	11
Let me just make sure everybody who's on the phone can	12
hear me. 	I suppose that most folks are listen-only, but I'm	13
particularly concerned with Hilton’s counsel, Mr. Neff.	14
MR. NEFF: 	(Via telephone) Yes, Judge. 	This is Mr.	15
Neff. 	I can hear you well. 	Thank you.	16
THE COURT: 	All right. 	This matter comes before the	17
Court on the April 24, 2012 motion of MSR Resort Golf Course,	18
LLC, et al., for entry of an order estimating damages resulting	19
from rejection of the Hilton Management Agreements, and an	20
order authorizing rejection of the Hilton Management	21
Agreements, which I'm going to refer to as "the motion."	22
In the motion, the debtors seek estimation of the	23
damages Hilton would sustain if the debtors reject three	24
management agreements.	25
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4
The management agreements relate to three properties:	1
one, the Arizona Biltmore Resort & Spa in Phoenix, Arizona;	2
two, the La Quinta Resort and Club PGA West in La Quinta,	3
California; and three, the Grand Wailea Resort Hotel & Spa in	4
Maui, Hawaii.	5
The Court conducted a trial on this matter over the	6
course of five days: 	June 27th, 29th, July 2nd, 3rd, and July	7
13 th . 	The Court at trial heard from five fact witnesses and two	8
experts on behalf of Hilton and one fact witness and one expert	9
witness on behalf of the debtors, in addition to materials	10
submitted by the debtors as part of their motion.	11
In connection with acquiring these three management	12
agreements, Hilton prepared a November 2005 investment	13
memorandum. 	That memorandum contained Hilton's then present	14
value of the future revenues from the three agreements at	15
roughly $260 million. 	That valuation of the three management	16
agreements was "predicated on realizing incentive fees," fees	17
that are provided for under certain circumstances in the three	18
management agreements.	19
Hilton assumed it would achieve incentive fees	20
starting in 2006, and would achieve the maximum contractual	21
incentive fee starting in 2010. 	At that time, in 2005, it	22
further assumed it would continue to receive the three percent	23
maximum incentive fee stream until the end of the contractual	24
term.	25
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5
For a variety of reasons that were discussed on and	1
off at the trial, Hilton did not receive the incentive fee	2
stream it anticipated. 	It has not, in fact, received any	3
incentive fees under these management agreements since 2007.	4
It does not seek the payment of incentive fees as part of the	5
damages sought in this proceeding.	6
Hilton's 2005 valuation was based on the full thirty-	7
year term, including the seven years from 2006 to 2012, for	8
which it has already received payment; and to date, it's	9
received $79 million in fees under the management agreements.	10
Turning to the three management agreements here, they	11
contemplate certain payments to the hotel manager. 	For	12
purposes of the Court's inquiry, these provisions regarding	13
payment are the same for the three agreements.	14
The first category of payments under the management	15
agreements is the management fee, set forth in Article 5.1 of	16
the management agreements. 	Under Article 5.1, the management	17
fee includes a base fee and an incentive fee that we've already	18
discussed. 	The management agreement defines the "base fee" for	19
management services as:	20
"An amount equal to two percent (2%) of gross	21
revenues."	22
The incentive fee, as mentioned earlier, is triggered	23
only if Hilton satisfies certain performance thresholds, which	24
are not at issue in this proceeding.	25
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6
The second category of payments contemplated by the	1
management agreements is something called the "corporate	2
overhead fee." 	Pursuant to Article 5.3 of the agreements, a	3
manager will receive a corporate overhead fee for corporate	4
overhead expenses that it incurs in connection with managing	5
the resorts. 	In the words of Article 5.3, the manager is	6
“reimbursed” for corporate overhead in the amounts equal to one	7
percent of gross revenues.	8
The third category of payments contemplated by the	9
management agreements is the so-called "group services	10
expense." 	Article 5.2 of the management agreements provides	11
for the manager to receive reimbursement for group services	12
expense in the amount of up to two percent for each of the	13
resorts' revenues. 	Group services expense is used to fund	14
marketing, advertising, reservations, and other promotional	15
services that the manager provides in managing the resorts.	16
Several other provisions of the management agreements	17
are relevant to this dispute, although they are not payments	18
that Hilton seeks as part of the proceedings.	19
The first of these is the Article 6 provision for	20
capital expenditures. 	Under that provision, the debtors -–	21
that is, the owners –- are obligated to contribute four percent	22
of gross resort revenue to fund necessary capital expenditures	23
at each resort. 	To the extent the manager believes funding of	24
additional capital expenditures is required beyond the four	25
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7
percent, the management agreements require the manager to seek	1
approval from the debtors. 	If there is a disagreement over the	2
amount of capital expenditures needed, the manager may pursue	3
that dispute by putting the debtors on formal notice of a	4
contractual conflict and pursue a dispute resolution procedure	5
to resolve the matter.	6
Other relevant provisions in the management agreements	7
include a provision regarding the terms of the agreements, with	8
the term to run through 2024, with a ten-year option out to	9
2034.	10
The management agreements also have a provision	11
addressing termination. 	In that provision, the debtors have	12
the right to terminate the agreements without the payment of	13
any additional fee or premium if the manager fails to satisfy	14
certain performance requirements. 	Specifically, the debtors	15
may terminate the management agreements without penalty if,	16
after 2010 and for two consecutive operating years:	17
“(i) the GOP (gross operating profits) achieved by the	18
Hotel for each Operating Year is less than ninety percent (90%)	19
of the GOP set forth in the approved Annual Operating Plan for	20
such Operating Year.” 	And this has been referred to as the	21
gross operating profit test."	22
“(ii) the Annualized RevPAR (revenue per available	23
room) for the Hotel for each of such Operating Years is less	24
than ninety-five percent of the Annualized RevPAR of the	25
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8
Competitive Set for each respective Operating Year.” 	And	1
that's been referred to as the "RevPAR performance test."	2
If the manager, here Hilton, fails to satisfy the	3
performance tests, and thus faces termination, it can make a	4
cure payment to the debtors to avoid termination and continue	5
managing the resorts.	6
The final provision that is relevant in the management	7
agreements for our purposes is a liquidated damages provision.	8
And that provides that if, after 2024, the debtors sell the	9
resorts and terminate Hilton as manager, Hilton is entitled to	10
a specified termination fee in the amount equal to the product	11
of the total management fee paid or payable by the manager for	12
the twelve-month period prior to the effective date of	13
termination, multiplied by a specified multiplier that varies	14
under the circumstances, and which we don't need to address in	15
this proceeding.	16
Turning now to the governing legal standard for this	17
dispute, the Court observes that each of the management	18
agreements is governed by the laws of the state in which the	19
subject resort is located. 	Accordingly, the laws of Arizona,	20
California, and Hawaii will govern the calculation of damages	21
to which Hilton will be entitled upon the rejection of each	22
respective management agreement.	23
These three states generally agree that, in a breach	24
of contract action, a plaintiff may recover the amount of	25
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9
damages necessary to place it in the same position it would	1
have occupied had the breach not occurred. 	The usual recovery	2
for the breach of a contract is the contract price or the lost	3
profits therefrom.	4
To calculate lost profits, expenses are subtracted	5
from revenue. 	Only net profits, not gross profits, are	6
recoverable for breach of contract. 	These depend on the	7
particular transaction at issue, which dictates what expenses	8
need to be deducted from the gross profits to determine the	9
appropriate figure.	10
Arizona Courts have recognized that compensatory	11
contract damages will be awarded for the net amount of losses	12
caused and gains prevented. 	See Biltmore Evaluation &	13
Treatment Services v. RTS NOW, LLC, 2009 WL 223293, at *2	14
(Ariz. Ct. App. Jan. 29, 2009). 	Similarly, California Courts	15
have observed that damages are based on net profits, which they	16
have consistently defined as gains made after deducting the	17
value of labor, materials, rents, and all expenses, together	18
with the interest of the capital employed. 	See Electronic	19
Funds Solutions v. Murphy, 36 Cal. Rptr. 3d 663, 676 (Cal Ct.	20
App. 2005). 	Finally, Hawaii has recognized that a non-	21
breaching party may recover damages that arise naturally from	22
the breach, or that were in the contemplation of the parties at	23
the time of contracting. 	See Jones v. Johnson, 41 Haw. 389,	24
1956 WL 10315, at *3 (Haw. 1956).	25
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10
The Court notes that the parties do not disagree about	1
what the applicable law is, although they strongly disagree	2
with how it should be applied in this case. 	Applying the	3
applicable law and relevant provisions of the management	4
agreements, the parties reach very different conclusions about	5
the proper measure of damages.	6
The Court notes that both parties use an expert to	7
provide a breakdown of the respective numbers on damages, as	8
well as an explanation of how each component is calculated.	9
Hilton's expert for this purpose was Roger Cline, and the	10
debtors' expert for this purpose was Thomas Morone.	11
On the one hand, Hilton contends it is entitled to	12
$334 million for rejection of these three management	13
agreements. 	Hilton's requested $334 million is broken into	14
four general categories:	15
First, it seeks damages of some $165 million for fees	16
under the three management agreements. 	These fees include a	17
base fee and the corporate overhead fee but do not, as	18
previously mentioned, include any damages for an incentive fee.	19
A large difference between the parties' calculation of	20
damages results from their use of different discount rates to	21
provide a current valuation for the worth of the payments that	22
Hilton would receive in the future. 	Hilton uses an eight	23
percent discount rate.	24
The second component of damages that Hilton seeks is	25
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11
for group services expenses of approximately $38.9 million.	1
Third, Hilton seeks damages of approximately $120	2
million for so-called "brand damages." 	It describes "brand	3
damages" as the impact of the rejection of these three	4
management agreements on its Waldorf=Astoria brand.	5
Fourth and finally, Hilton seeks approximately $9.8	6
million in damages for losses relating to what it alleged to be	7
debtors' plan to expand the Grand Wailea Resort by some 300	8
rooms in the near future, thus purportedly expanding the	9
profits that Hilton would receive under that particular	10
management agreement.	11
Debtors, on the other hand, see things far	12
differently. 	They argue that Hilton is only entitled to	13
approximately $46 million in damages. 	Of the three categories	14
of damages sought by Hilton, debtors claim that Hilton is	15
entitled only to the first, the management fee, and that the	16
management fee should consist solely of the base fee. 	Thus, in	17
debtors' view, Hilton should get no damages for the corporate	18
overhead fee, group services expense, brand damages, and the	19
Grand Wailea expansion.	20
Moreover, debtors arrive at their figure of $46	21
million only after subtracting certain money for cure payments	22
that debtors contend Hilton will have to make for failing to	23
meet the performance test in the future at the Grand Wailea	24
Resort.	25
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12
I turn first to the issue of the management fees. 	And	1
in looking in that, the Court must first project the fees per	2
year that Hilton would earn under the management agreements and	3
reduce these profits by the expenses that Hilton would incur to	4
arrive at a profit margin. 	In doing that, one looks to the	5
total projected revenues at the Resorts as these revenues are	6
used to calculate the fees.	7
Mr. Morone and Mr. Cline's projections for the resorts	8
as, one witness put it, "quite close." 	Roger Cline, Hilton's	9
expert, projects approximately $14.6 billion in revenue.	10
Thomas Morone, an expert for the debtors, opines that the	11
projected revenue for purposes of the management agreements is	12
approximately $13 billion.	13
There are only two real differences between these two	14
different predictions of revenue. 	The first is the inflation	15
rate, where Mr. Cline uses three percent and Mr. Morone uses	16
2.5.	17
The Court concludes that the appropriate inflation	18
rate is 2.5. 	The Court finds that Mr. Morone reasonably relied	19
on historical data from the Bureau of Labor and Statistics.	20
That data shows the inflation rate for the past ten years at	21
2.4 percent. 	And he adjusted upwards to account for the	22
slightly higher twenty-year historical average of 2.6 percent,	23
resulting in his inflation rate of 2.5.	24
The Court rejects Mr. Cline's figure, which he has	25
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13
adopted from an appraisal firm HVS, which is a standard	1
inflation rate that they use for hotel appraisals. 	Mr. Cline	2
also relies on a website called "forecastchart.com" to conclude	3
the appropriate rate is three percent. 	But he has not	4
submitted any evidence that forecastchart.com is a reliable	5
industry standard website. 	In any event, his reliance on	6
inflation rate used by another company without proffering any	7
evidence as to how it was determined or why it is appropriate	8
is insufficient to refute Mr. Morone's proposed inflation rate	9
based on historical data.	10
The second difference between the parties' predictions	11
is the level of capital expenditures to be made by the debtors	12
in the resorts. 	Mr. Cline assumes an eight percent	13
contribution by the debtors. 	In support of this number, Diane	14
Jaskulske, Hilton's witness, testified that Hilton averages	15
eight to ten percent of revenue annually for properties similar	16
in size and complexity as the resort. 	Matthew Bailey, Managing	17
Director of Grand Wailea, testified that four percent is simply	18
too low to maintain the operating standards under Hilton's	19
management agreement.	20
On the other hand, Mr. Morone utilizes a four percent	21
capital expenditure assumption, as per Article 6 of the	22
management agreements. 	Article 6 obligates the debtors to	23
contribute four percent of resort revenue to fund necessary	24
capital expenditures. 	Debtors argue that they have never	25
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14
agreed to anything beyond the four percent, and that Hilton has	1
never formally requested any increase.	2
The Court finds that six percent is the appropriate	3
figure to use. 	The six percent, in fact, is derived from Mr.	4
Morone's testimony that the debtors have consistently spent six	5
percent, on average, on capital expenditures. 	The Court	6
rejects Hilton's eight percent as too high, given that Hilton	7
must follow certain procedures outlined in Article 6, in order	8
to receive additional capital expenditures funding beyond the	9
four percent reserve fund. 	And Hilton has never commenced the	10
dispute resolution procedure set forth in that article.	11
Hilton's position about the need for eight percent is	12
further undercut by the fact that Hilton, in its 2005 memo,	13
viewed the resorts to be in excellent shape before purchasing	14
these management contracts. 	And Mr. Bailey testified that, in	15
his view, the resort was in better shape today than it was at	16
the time of the purchase.	17
Moving on to the second component of damages, we turn	18
to the corporate overhead fee. 	The debtors' expert Mr. Morone	19
deducted the corporate overhead fee as a reimbursed expense,	20
while Hilton's expert Mr. Cline included the full one percent	21
of the corporate overhead fee in his calculation of lost	22
profits and deducted no expense incurred by Hilton in managing	23
the resorts.	24
In contending that the corporate overhead fee is a	25
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15
reimbursement, rather than profit, debtors rely, among other	1
things, upon the language in Article 5.1 of the management	2
agreement, which expressly states that the corporate overhead	3
fee is to be reimbursed to the manager. 	They also note that	4
Section 1 of the management agreement states that the	5
management fee includes only the base and incentive fees, and	6
that the corporate overhead fee is never described as	7
"consideration" for Hilton's performance under the management	8
agreements. 	Debtors finally note that the liquidated damages	9
and termination provisions do not contemplate corporate	10
overhead fees being incorporated as liquidated damages in the	11
event of termination.	12
For Hilton's part, its expert Mr. Cline assumed no	13
expense for corporate overhead and payment of the full one	14
percent of profit. 	His conclusions were echoed by Hilton's	15
witness Diane Jaskulske, who testified that she was ninety-nine	16
percent certain that losing the resorts will not change "one	17
iota of what [is done in the] corporate office." 	Hilton's	18
corporate offices, she said, rarely assist directly in	19
providing services to the resort.	20
Instead, Hilton views corporate overhead fee as merely	21
a term that Hilton inherited when it acquired the management	22
agreements from the resorts' former manager KSL. 	As Hilton's	23
witness Ted Middleton explained, the corporate overhead fee is	24
simply viewed by Hilton to be analogous -- that is, the same --	25
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16
as the two percent base fee.	1
Based on all the evidence before the Court and the	2
applicable law, the Court concludes that Hilton is entitled to	3
the corporate overhead fee, provided that appropriate	4
deductions are made for expenses. 	Even though the management	5
agreements do not include the corporate overhead fee as part of	6
the management fee, there is no dispute that the fee would have	7
been earned had the debtors not rejected the Hilton Management	8
Agreements.	9
Further, Section 5.3 does not state that the corporate	10
overhead fee is reimbursable or subject to a cap like	11
reimbursable expenses. 	The management agreements only provide	12
that Hilton is to receive one percent of gross revenues.	13
While the debtors argue that the termination provision	14
is persuasive, the termination provision reflects an agreement	15
between the parties as to the amount that the debtors would	16
have to pay at a much later date to terminate the agreements,	17
as opposed to proof of actual damages. 	And those items are not	18
necessarily the same. 	See, e.g., Vrgora v. Los Angeles Unified	19
School Dist., 200 Cal. Rptr. 130, 135 (Cal. Ct. App. 1984),	20
explaining that liquidated damages are not necessarily a	21
proximation of actual damages suffered. 	See also Pima Sav. and	22
Loan. Ass'n v. Rampello, 812 P.2d 1115, 1118 (Ariz. Ct. App.	23
1991), explaining liquidated damages need not approximate	24
actual loss.	25
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17
However, the Court finds that Hilton's 2006 10-K form	1
is persuasive in suggesting that Hilton does incur additional	2
annual overhead expenses when adding new properties to the	3
portfolio. 	Indeed, the Court rejects as incredible the	4
testimony of various witnesses that there is no corporate	5
overhead associated with these resorts, which all parties	6
describe as "iconic," and indisputably far more complex than a	7
typical hotel managed by Hilton.	8
As to the exact measure of these corporate overhead	9
expenses, the Court will use Hilton's own estimate of such	10
expenses in its 2005 internal memorandum, which was prepared	11
before purchasing these management agreements. 	That memorandum	12
calculates its expected cost of managing the resorts at .25 of	13
revenues, or 8.33 percent of a three percent base management	14
fee.	15
The Court rejects as self-serving the only other	16
evidence of the actual amount of corporate overhead, which was	17
an estimate prepared by Hilton's treasurer solely for the	18
purpose of this litigation.	19
The Court now turns to the applicable discount rate.	20
A discount rate must be applied to calculate the present value	21
of future payments owed to Hilton under the management	22
agreements, to account for the time value of money and the	23
financial risk of the fee stream. 	See In re Chemtura Corp.,	24
448 B.R. 635, 673 (Bankr. S.D.N.Y. 2011).	25
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18
In Chemtura, Judge Gerber noted that the discount rate	1
should be calculated at the time the contract was entered into.	2
Chemtura, at 677.	3
"Existing case law and common sense require that the	4
discounting to fix the damages award must reflect the	5
same payment risk insofar as the Court can accomplish	6
that as the original contract did."	7
Id. at 673.	8
The choice of an appropriate rate does not need to be	9
exact. 	See Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S.	10
523, 552-553 (1983), where the Court notes:	11
"We do not suggest that a trial judge should embark on	12
the search for delusive exactness."	13
The Court may choose a discount rate not proposed by	14
the parties. 	See In re 785 Partners, LLC, 2012 WL 959364, at	15
*5 (Bankr. S.D.N.Y. Mar. 20, 2012), holding that, since the	16
experts did not thoroughly explain their determinations of the	17
discount rate, the Court treated their opinions as the range	18
and selected an intermediate rate.	19
Although the weighted average cost of capital -- which	20
we'll discuss a bit more in a moment -- or the "WACC," is a	21
reasonable starting point in determining the proper discount	22
rate, the WACC must be adjusted to account for risk. 	See In re	23
M Waikiki, LLC, 2012 WL 2062421, at *4 (Bankr. D. Haw. June 7,	24
2012).	25
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19
Here, Hilton argues for an eight percent discount	1
rate. 	It contends that the risk of the management agreements	2
at the time they acquired them were de minimis. 	It contends	3
that eight percent is the industry standard, and it's what	4
Hilton uses to value its own management fees contracts. 	It	5
notes that the base management fee here is less risky than	6
other revenue streams because it is paid first from the hotel	7
revenue and, thus, far less risky than fees that are a function	8
of hotel profitability.	9
One Hilton expert, Mr. Hennessey, testified that the	10
proper discount rate was 7.5 percent, based among a variety of	11
things, including: mortgage rates for full service hotels as of	12
April 2006; and the rate generally utilized for hotel	13
investments as of April 2006. 	He also considered the WACC at	14
the time Hilton acquired the resorts and adjusted it downward	15
to, in his view, achieves a discount rate applicable to the	16
hotel company's reliable income stream derived from base	17
management fees. 	In his report, he referenced a report by Bear	18
Stearns, which gave Hilton's WACC at 8.1 percent. 	He also	19
testified he looked at Bloomberg, which reported Hilton's WACC	20
at 8.7 percent as of December 31st, 2005, and 8.2 percent in	21
the first quarter of 2006.	22
Debtors again have a different view. 	Their expert,	23
Mr. Morone, applied a 13.6 percent discount rate to the Arizona	24
Biltmore and the hotel in California, and a 14.6 percent	25
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20
discount rate to the Grand Wailea. 	He calculated Hilton's	1
overall weighted average cost of capital; the WACC, as of the	2
beginning of 2006, to be 10.6 percent. 	He noted that Mr.	3
Hennessey testified that Bloomberg's reported WACC of 8.7	4
percent relied on what's called a "beta" that was a default of	5
one percent; or, as Mr. Morone used, a beta of 1.29.	6
Beta is one of the components in calculating the WACC	7
for any company and measures that company risk in relation to	8
the rest of the market. 	Mr. Morone testified that the 1.29	9
beta is appropriate because Hilton stock was riskier than the	10
market as a whole, and for that he cited debtors' expert Derek	11
Pitts, who submitted an affidavit with the debtors' motion.	12
Mr. Morone adjusted Hilton's WACC to account for	13
property-specific risks, as the WACC reflects aggregate risk of	14
Hilton's entire diversified portfolio of management agreements,	15
relying on something called the "Ibbotson's Size-Risk Premium,"	16
Mr. Morone adjusted the WACC to reflect specific risks, such as	17
the size of the resorts, the brand, and the volatility as to	18
the Grand Wailea. 	He noted the Grand Wailea's additional risk,	19
in his view, included the remote location, the dependency on	20
air travel, the dependency on group travelers, and natural	21
conditions.	22
Based on the credible evidence and the applicable law,	23
the Court starts off by adopting the WACC used by Mr. Morone.	24
The difference between Bloomberg's WACC of 8.7 percent	25
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21
and Mr. Morone's determination is that Mr. Morone used a beta	1
of 1.29, as opposed to a beta of one. 	The affidavit of	2
debtors' expert Derek Pitts provides support for the assertion	3
of using a beta of 1.29; and in fact, Mr. Pitts' affidavit	4
provides the only real analysis of beta in this case.	5
Using that beta and information from Hilton's own 10-	6
K, I reach the conclusion that Hilton's WACC at the time of	7
entering these management agreements was 10.6.	8
Mr. Hennessey opined that Hilton's WACC was 8.1, but	9
based his finding upon an internal Bear Stearns estimate	10
published in December 2006, almost a year after Hilton acquired	11
the resorts.	12
I also note that Hilton's expert makes reference to	13
Bloomberg's WACC. 	There was discussion at trial that Bloomberg	14
apparently uses a default beta of one. 	It was unclear from the	15
testimony -- indeed, no one seemed to know -- if that default	16
of one was used by Bloomberg in all instances for Hilton or	17
even in all instances for all companies. 	And as no party has	18
provided any explanation of the basis for using that default of	19
one here, the Court instead relies on the 1.29 beta, for which	20
analysis has been provided by Mr. Pitts.	21
On the one hand, Hilton has failed to establish that	22
the management agreements lack any risk, and that its eight	23
percent rate that it applies to all acquired management	24
agreements is sufficient to discount its future fees upon	25
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22
rejection. 	Indeed, credible evidence has been presented	1
showing that these iconic resorts are exposed to unique risks	2
that make their revenue streams more volatile than a typical	3
Hilton property, supporting an upward adjustment of the WACC,	4
which represents the riskiness to Hilton's business as a whole.	5
Thus, the Court rejects the notion that the same risks apply to	6
these resorts as apply to the operation of one of Hilton's	7
Hampton Inns.	8
On the other hand, the debtors have failed to persuade	9
the Court that the attendant risks are as high as they claim.	10
There is credible evidence that the management fees here, taken	11
from gross revenues, rather than profits, are a less risky	12
source of revenue for Hilton than many of Hilton's other	13
revenue streams and other revenue streams at the resort.	14
For all these reasons, the Court will adjust the WACC	15
for the Arizona Biltmore and the La Quinta upward by one	16
percent, to arrive at a discount rate of 11.6. 	And this is to	17
account for the attendant risks identified by Mr. Morone and	18
discussed by Mr. Pitts.	19
The Court will adjust the WACC for the Grand Wailea by	20
two percent upwards, rather than one percent, to reach a	21
discount rate of 12.6, based on the aforementioned attendant	22
risks, plus additional risks unique to the Grand Wailea that	23
were discussed at the trial, and that have been mentioned	24
previously, including its location.	25
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23
The one additional percent increase is also	1
appropriate to account for the possibility that the Grand	2
Wailea may fail the performance tests over the life of these	3
agreements. 	The credible evidence was that there have been	4
real economic struggles in the recent performance of the Grand	5
Wailea, which is perhaps the most iconic, and thus most unique	6
of these three resorts. 	These struggles have been evidenced by	7
various metrics that Hilton itself prepared, rating performance	8
at the resort. 	These difficulties no doubt have been	9
influenced by the current economic downturn and Grand Wailea's	10
location and unusual dependence on group bookings for success,	11
bookings that are incredibly sensitive to the economy.	12
Such an adjustment for risk of termination has been	13
recognized by the courts. 	See M Waikiki, 2012 WL 2062421, at	14
*4-5, adjusting the WACC upwards to account for performance-	15
based termination risk. 	See also Pet Food Express Ltd. v.	16
Royal Canin USA, Inc., 2011 WL 1464874, at *12 (N.D. Cal.	17
2011), noting that the failure to reduce damages due to	18
uncertainty of lost profits towards the end of an agreement	19
ignores the contingency in the agreement that would have	20
allowed a defendant to terminate the agreement prior to the end	21
of the term for plaintiff's failure to perform its contractual	22
duties and obligations.	23
The Court now turns to the related issue of cure	24
payments. 	Debtors' expert Mr. Morone deducted some $7 million	25
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24
in cure payments because he contends that Hilton will fail the	1
performance test and will need to make cure payments on two	2
occasions. 	First, in his view, it will fail in 2013 and '14,	3
and because the debtors can terminate the contract, Hilton will	4
need to make a cure payment of some $6 million. 	As to the	5
second instance, based on a so-called "Monte Carlo Analysis,"	6
Mr. Morone concludes that Hilton will again fail the	7
performance test as to the Grand Wailea in 2031, prompting a	8
second cure payment of almost a million.	9
Mr. Morone believes that both these cure payments	10
should be deducted from Hilton's profits.	11
The Court rejects the debtors' arguments as unduly	12
speculative for several reasons. 	First, while the Court agrees	13
there is a risk that Hilton will fail the performance test at	14
the Grand Wailea, that failure has not been shown to the degree	15
of certainty so as to make it appropriate to deduct cure	16
payments from Hilton's profits. 	As already discussed, this	17
risk of failure should instead be accounted for in application	18
of the discount rate for the Grand Wailea.	19
Indeed, in reaching that conclusion, the Court notes	20
that the performance test here has been described as fairly	21
easy to satisfy by some observers. 	And while I won't go that	22
far, I do note that Hilton's operating requirements are based	23
in part on Hilton Resorts' annual operating plan that it itself	24
prepares.	25
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Additionally, the Court notes that the Monte Carlo	1
Analysis is unduly speculative. 	Mr. Morone himself conceded	2
that he was unaware of its use in projecting future failure in	3
hotel management contracts. 	Indeed, the Court notes that the	4
prediction that Hilton will fail in 2031 seems to be at odds	5
with Mr. Morone's approach of only estimating revenues out for	6
ten years because he found predictions after ten years not to	7
be sufficiently reliable. 	I turn next to group services	8
expenses. 	Hilton seeks some $38 million, almost $39 million,	9
in damages stemming from lost group services expenses in the	10
event the management agreements are rejected. 	This figure is	11
comprised of two components. 	The first is some $17 million in	12
the net present value of lost group services expense, and the	13
second is some $21.7 million in so-called "key money."	14
The management agreements define group services	15
expenses as each hotel's:	16
"cost for participation in the group services	17
(including reasonable corporate overhead related	18
thereto) as determined in accordance with Section 5.2,	19
excluding reimbursable expenses which shall be charged	20
separately."	21
Group services includes services and facilities	22
relating to advertising, marketing, promotion, publicity,	23
public relations, and group sales services, for all	24
Waldorf=Astoria Hotels and Resorts, as well as any additional	25
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program or group benefit such as the Hilton HHonors program,	1
that are provided to all managed hotels. 	Group services	2
expense are capped at two percent of resort revenue and are	3
distinct from the corporate overhead fee.	4
Hilton argues that the group services expense was	5
expressly provided for in the management agreements; and thus,	6
damages relating to them were foreseeable at the time of	7
contracting. 	Hilton states that the brand fund that	8
Waldorf=Astoria is currently operating operates at a loss, and	9
that Hilton subsidizes it already, and that Hilton would have	10
to self-fund the amounts formerly contributed to maintain the	11
same level of brand support and marketing for the	12
Waldorf=Astoria brand. 	Hilton believes that this funding will	13
have to continue until Hilton completely replaces the amount of	14
group services expenses previously contributed by the Hilton	15
Resorts, which its primary expert estimates will take at least	16
five years.	17
In addition to the group services expense itself,	18
Hilton seeks to recover over $21 million in so-called "key	19
money," which it alleges are payments that it will need to make	20
to obtain additional management agreements to replace the ones	21
that it would lose and therefore, to replace the lost group	22
services expense. 	Key money represents funds that a management	23
company may be required to pay a hotel owner to obtain those	24
management rights.	25
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For their part, the debtors argue that the group	1
services expenses exceed the cap established in the management	2
agreements, and accordingly should be reduced to the amount	3
actually expended, so that Hilton is no longer subsidizing the	4
difference. 	The debtors further argue that Hilton is also not	5
entitled to the approximately $17 million in group services	6
expense damages because the management agreements don't permit	7
recovery of such expenses, and that Hilton will replace any	8
lost group services by 2014, and that Hilton can simply elect	9
to avoid incurring any such damages. 	Finally, the debtors	10
assert there is no basis for Hilton's request for the $21	11
million in key money.	12
Given the facts and applicable law, the Court grants	13
in part and denies in part Hilton's request for damages in	14
connection with group services expense. 	The language of the	15
management agreements contemplates the payment of group	16
services expenses for the costs incurred in providing group	17
services to the Waldorf=Astoria brand generally.	18
The evidence established that Hilton has used such	19
funds for their intended purpose. 	The mere fact that Hilton	20
may spend more than is required for that purpose for its own	21
business reasons is irrelevant. 	All that matters is that	22
Hilton seeks only to recover the fee provided for under the	23
management agreements, not any extra costs beyond that.	24
Moreover, there was no evidence at trial that Hilton intended	25
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in the future to spend less on group services for the	1
Waldorf=Astoria brand than is contemplated by the management	2
agreements.	3
Relatedly, the Court concludes that Hilton's request	4
for payments of these fees for a five-year period represents an	5
appropriate exercise of its duty to mitigate its damages. 	See,	6
e.g., 	Shaffer v. Debbas, 21 Cal. Rptr. 2d 110, 114 (Cal. Ct.	7
App. 1993), as well as Shahata v. W Steak Waikiki, LLC, 721	8
F.Supp. 2d 968, 988 (D. Haw. 2010).	9
The Court notes that Hilton has sought some $17	10
million in group services expense, a number that has been	11
described to me as having been discounted to net present value.	12
While the Court awards group services expense, it notes that	13
the correct number may be different than the $17 million.	14
While the parties do not address this issue, the Court's prior	15
ruling on the discount rate presumably applies to this	16
component of damages; therefore, this number presumably should	17
be adjusted accordingly consistent with this Court’s earlier	18
ruling on the discount rate.	19
Moving on to the second aspect of Hilton's group	20
services claim, the Court rejects Hilton's request for the	21
payment of so-called "key money" for several reasons.	22
As an initial matter, the provision to pay key money	23
is nowhere mentioned in the management agreements, in stark	24
contrast to the group services expense itself. 	So it is very	25
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hard to say the key money was within the parties' contemplation	1
at the time of contract formation as an appropriate measure of	2
damages, and these requested damages are particularly troubling	3
given that the amount of key money sought is in fact greater	4
than the amount of damages actually sought for group services	5
expense under the contract itself.	6
In any event, the evidence at trial was insufficient	7
to support Hilton's claim for key money damages. 	Hilton cannot	8
identify which hotel agreements this key money will be used to	9
acquire. 	Instead, Hilton's claim for recovery of key money is	10
not grounded on any specific facts, but rather on Mr. Cline's	11
professional judgment.	12
But Mr. Cline based his analysis, specifically the	13
twenty-five percent ratio assumption he used for calculating	14
key money, upon conversations with Ted Middleton, Hilton's Vice	15
President of Development. 	Middleton, however, later testified	16
that he had done no analysis of the amount of key money that	17
Hilton would be required to pay to replace the group services	18
expense payments, and was not aware of anyone else at Hilton	19
who performed such analysis.	20
Finally, the Court notes that Hilton itself concedes	21
that whatever management agreements it may one day acquire	22
could very well be management agreements that Hilton would seek	23
to acquire regardless of whether these management agreements	24
are actually rejected.	25
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So for all those reasons and the lack of evidence	1
supporting the necessity of key money payments, the Court	2
rejects that component of damages.	3
I now turn to Hilton's request for so-called "brand	4
damages." 	Hilton seeks approximately $120 million in damages	5
stemming from its alleged damage to Hilton's Waldorf=Astoria	6
brand. 	These damages purport to stem from the debtors'	7
termination of the management agreements and flow from the	8
theory that these properties are "iconic and irreplaceable,"	9
which is a phrase that has been used often in this trial and	10
seems not to be in dispute.	11
Hilton argues that such damages were contemplated by	12
the parties when Hilton acquired the agreements in 2006, as	13
part of an effort to launch the Waldorf=Astoria brand. 	Hilton	14
believed the acquisition of these management agreements for	15
these three resorts would enable Hilton to generate additional	16
business, as well as credibility among investors and within the	17
real estate development community.	18
Hilton further alleges that the loss of the resorts	19
would contribute to tension among other Waldorf=Astoria owners	20
who have already been pressuring Hilton to expand and grow the	21
brand, particularly given that the resorts collectively account	22
for some twenty-five percent of the rooms comprising that	23
brand.	24
Hilton's determination of the amount in brand damages	25
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is based on two separate analyses that focus on the time period	1
spanning from 2012 to 2034. 	The first estimate provides for	2
losses to the existing pipeline of Waldorf=Astoria properties	3
and any impact to the brand's future development program.	4
Utilizing this approach, Hilton estimates brand damages	5
totaling a hundred-and-twelve-some-odd million dollars. 	The	6
second methodology estimates the overall value of the	7
Waldorf=Astoria brand and determines that the brand will lose	8
56.5 percent of its value. 	Under that analysis, Hilton	9
estimates damages in the total amount of $128 million. 	Taking	10
the midpoint between these two figures, Hilton seeks damages	11
for brand loss in the total amount of $120 million.	12
The Court denies Hilton's request for brand damages.	13
Like the request for key money, the notion for brand damages is	14
nowhere contained in the management agreements. 	Instead, the	15
notion of protecting and growing the brand is covered by the	16
management agreements' group services expense, which are	17
damages that have been requested by Hilton and granted by the	18
Court.	19
Moreover, Hilton's request for brand damages is	20
fatally undercut by lack of evidence. 	Hilton's expert Roger	21
Cline set forth his proposed calculation of damages, presuming	22
that there will be damage to the Waldorf=Astoria name. 	But	23
other than Mr. Cline’s opinion, Hilton has offered no hard	24
evidence of damage to its business or business opportunities,	25
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including growth and expansion.	1
For example, Hilton has not provided evidence that a	2
current hotel owner, potential hotel owner, or Hilton HHonors	3
client has presented any concerns about the impact of rejection	4
on the brand. 	Thus, there is no evidence that any current or	5
future owner would refuse to engage in business with Hilton,	6
would back out of a deal, or would even seek to receive reduced	7
rates.	8
In fact, Hilton's own witnesses testified that no	9
owner has made any indication to Hilton that they would pull	10
their property from Hilton if these three resorts were lost;	11
nor could Hilton's witnesses identify any perspective	12
Waldorf=Astoria properties that would refuse to join the brand	13
as a result of rejection of these management agreements, or any	14
co-branding opportunities that will be lost. 	Indeed, none of	15
the hotel management agreements contain provisions that would	16
enable a hotel owner a right to terminate its own agreement	17
with Hilton by virtue of the loss of these three management	18
agreements, or at least no witness was aware of any such	19
provision. 	Hilton has not offered any evidence establishing	20
that any new hotel will elect not to join the Waldorf=Astoria	21
brand because of the management agreement rejections.	22
Accordingly, the Court concludes that Hilton has not	23
shown such brand damage will occur with the reasonable	24
certainty required for being awarded by this Court.	25
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The Court recognizes that rejection here has not yet	1
occurred; and thus, this case is different than a normal breach	2
of contract case, where the parties can look back historically	3
at events. 	This inevitably may mean that it is harder for	4
Hilton to provide evidence of brand damages.	5
But the Court notes that this bankruptcy and rejection	6
proceeding have been the subject of media coverage, and the	7
debtors have made it very clear from the beginning of this case	8
more than a year ago that rejection of these management	9
agreements was a real possibility, and evaluating the	10
management agreements in this case for rejection was one of the	11
three cornerstones of the debtors' restructuring efforts.	12
Given the well publicized nature of these proceedings, the	13
Court cannot grant the very substantial brand damages sought by	14
Hilton without some real-world evidence of damage to the brand.	15
And relatedly, the Court notes that the brand damages sought	16
are more than thirty-five percent of the total damages	17
requested in this case.	18
In addition to the lack of concrete evidence from	19
Hilton's fact witnesses, there are difficulties with some of	20
the assumptions underlying the brand damages calculation. 	For	21
example, the brand damages sought assume a valuation of the	22
Waldorf=Astoria brand at some 2.265 billion, but that value is	23
contradicted by some of Hilton's own documents and public	24
filings, which set forth a different valuation.	25
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Furthermore, Mr. Cline's lost opportunities damages	1
calculation is based on an estimation that, notwithstanding the	2
rejection, Waldorf=Astoria will increase its number of hotels	3
by twenty-two in the near future, an aggressive assumption that	4
appears fundamentally at odds with Hilton's claim that the	5
Waldorf=Astoria brand would be harmed by rejection. 	And	6
indeed, his projection as to the brand's performance going	7
forward is similarly aggressive into the future, undercutting	8
the argument of brand damage.	9
Finally, Mr. Cline's measure of calculating damages is	10
premised upon the notion that the measure of damages is	11
directly correlated to the number of rooms lost. 	But that	12
notion is undercut by evidence at trial that there will be	13
times when a brand might lose a hotel from its group, and that	14
loss may not inflict any damage whatsoever to the brand. 	Mr.	15
Cline did not offer any limiting principle regarding his theory	16
of brand damages to reflect this fact.	17
The rejection of Hilton's brand damage claim is	18
consistent with the applicable case law. 	Applicable state law	19
generally holds that speculative contract damages cannot serve	20
as a proper legal basis for recovery. 	See Scott v. Pacific Gas	21
& Electric Company, 904 P.2d 834, 845 (Cal. 1995); that case	22
noting that it was a fundamental principle of contract law that	23
speculative, remote, imaginary, contingent, or merely possible	24
contract damages cannot serve as a legal basis for recovery,	25
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and absent any definable loss, a party is entitled only to	1
nominal damages. 	See also McDevitt v. Guenther, 522 F.Supp. 2d	2
1272, 1287 (D. Haw. 2007); that case highlighting that, under	3
Hawaiian law, speculative damages are not recoverable on	4
actions arising under contract or in tort. 	See also Southern	5
Union Co. v. Southwest Gas Corp., 180 F.Supp 2d 1021 (D. Ariz.	6
2002); that case holding that a party cannot recover for lost	7
profit damages on the grounds it is too speculative to support	8
recovery.	9
Moreover, the Court notes that the States of Arizona,	10
California, and Hawaii recognize that damages must be proven	11
with reasonable certainty. 	Walter v. Simmons, 818 P.2d 214	12
(Ariz. Ct. App. 1991); that case putting the burden on the	13
plaintiff to prove damages stemming from a breach of contract	14
with reasonable certainty. 	See also Maggio, Inc. v. United	15
Farm Workers of America, 278 Cal. Rptr. 250, 264 (Cal. Ct. App.	16
1991); that case noting that damages for loss of profits may be	17
denied as "unestablished" or as being too uncertain or	18
speculative if they cannot be calculated with reasonable	19
certainty. 	See also Omura v. American River Investors, 894	20
P.2d 113, 116 (Haw. Ct. App. 1995), stating that the extent of	21
loss must be shown with reasonable certainty and cannot be	22
based on mere speculation or guesswork.	23
These principles about certainty are applicable to	24
situations where parties assert claims for lost profits	25
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resulting from damage to plaintiff's reputation, and case law	1
from all three states reflect this. 	See, e.g., Dong Ah Tire &	2
Rubber Co., Ltd. v. Glasforms, Inc., 2010 WL 1691869, at *5	3
(N.D. Cal. 2010); that case holding that there was insufficient	4
evidence to support any award of damages for lost profits or	5
reputation restoration, and that lost profits must be proven to	6
be certain as to their occurrence and their extent. 	See also	7
Hi-Pac Ltd. v. Avoset Corp., 26 F.Supp. 2d 1230, 1237 (D. Haw.	8
1997); that case holding that plaintiffs cannot recover on a	9
claim that a defendant's breach of contract damaged the	10
plaintiff's reputation, and thereby resulting in lost profits,	11
because the plaintiffs were unable to identify or reasonably	12
calculate any specific lost sales or profits, and accordingly	13
failed to meet their burden.	14
Also instructive are this jurisdiction's decisions	15
relating to claims on reputation damages. 	Generally, the	16
standard to show loss of good will or reputation damages is	17
high. 	In ESPN, Inc. v. Office of Comm’r of Baseball, 76	18
F.Supp. 2d 416 (S.D.N.Y. 1999), for example, the Court held	19
that under New York law, in order to recover damages for loss	20
of good will, business reputation, or future profits, the	21
claimant must prove the fact of loss with certainty, and the	22
loss must be reasonably certain in amount.	23
The Second Circuit in Toltec Fabrics, Inc. v. August,	24
Inc., 29 F.3d 778, 781 (2d Cir. 1994), presented a three-part	25
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test for recovery:	1
The first being that the claimant must show that there	2
was in fact a loss of good will that must be proved with	3
reasonable certainty.	4
The second being that claimant must present objective	5
proof of that loss.	6
And third, that the claimant must show that the loss	7
was caused by the opposing party's breach.	8
These two cases, while outside the jurisdictions at	9
issue in this proceeding, are instructive in how to value and	10
approach the issue of brand damages here.	11
Hilton relies particularly on two cases in support of	12
its contention that it is entitled to brand damage, but neither	13
case supports its position.	14
In Woolley v. Embassy Suites, Inc., 278 Cal. Rptr. 719	15
(Cal. Ct. App. 1991), the Court considered a request by a hotel	16
branding and management company for a preliminary injunction to	17
prevent a hotel owner from terminating the hotel management	18
agreements. 	The Court there declined to grant the injunction,	19
noting that computation of a damage award for the loss to	20
Embassy's reputation as a result of wrongful termination could	21
be adequately addressed through expert testimony.	22
Nothing in this case mandates or counsels the award of	23
brand damages here, however.	24
Second, Hilton cites to In re M Waikiki, LLC, 2012 WL	25
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2062421 (Bankr. D. Haw. June 7, 2012). 	In that case, the Court	1
denied Marriott's request for damages to its reputation and	2
good will associated with the hotel owner's alleged breach of	3
Marriott's management agreement. 	The Court's holding was based	4
on its finding that Marriott presented no evidence of any	5
damage to the brand reputation.	6
Hilton argues that this case supports its position	7
because the Hawaiian Court stated that its holding was without	8
prejudice to the ultimate allowance of Marriott's claims.	9
However, this case does nothing more than support the Court's	10
conclusion that Hilton cannot recover such damages without	11
proof.	12
Finally, I turn to the last item of damages sought,	13
those relating to the potential expansion of the Grand Wailea.	14
Hilton argues that it will incur losses in the amount of some	15
$9 million in connection with the proposed expansion at the	16
Grand Wailea in the event the debtors reject the management	17
agreement.	18
In April 2012, the County of Maui granted approval of	19
a two-hundred-and-fifty-million-dollar expansion at the Grand	20
Wailea, which would add approximately 310 additional rooms and	21
increase the size of the resort from 780 to 1,090 rooms. 	Such	22
expansion has been contemplated as far back as 2005.	23
Hilton argues that this expansion, which could be	24
completed by 2017, would add tremendous value to the resort,	25
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with Hilton estimating such value at over $255 million.	1
Specifically, Hilton believes that expansion will result in a	2
significant increase in gross revenues; and accordingly, base	3
management fee income to Hilton, once expansion is completed.	4
Termination of the management agreements would prevent Hilton	5
from reaping the benefits of expansion in the form of increased	6
fees. 	Hilton opines that, using a thirteen percent discount	7
rate, the net present value of Hilton's foregone base fees and	8
corporate overhead fees total some $9.8 million.	9
But the Court rejects Hilton's claim for damages	10
associated with a possible expansion of the Grand Wailea.	11
While the debtors have the right to expand the Grand Wailea,	12
the debtors presented testimony at trial that they have no	13
obligation, contractual or otherwise, to undertake the	14
expansion; they also assert that they presently have no plans	15
to expand the Grand Wailea; and third, that they have made no	16
commitment to do so. 	None of these assertions can credibly be	17
disputed.	18
I parenthetically note that one of Hilton's witnesses	19
briefly suggested that the debtors were contractually obliged	20
to maximize operations at the resort, and that this meant the	21
debtors were obligated somehow to move forward with this	22
possible expansion. 	That position, I conclude, is a wild over-	23
reach, based on the contract language at issue.	24
But in any event, turning back to the debtors'	25
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position here, it's not surprising, given the facts. 	As	1
previously discussed, the trial was full of evidence regarding	2
the poor performance of the Grand Wailea. 	The debtors' witness	3
Thomas Shumaker described the approval here obtained by the	4
debtors as a right to expand and conceded that this right was	5
enormously valuable. 	But he credibly testified that any	6
potential expansion of the Grand Wailea must be viewed in the	7
context of the future performance of the resort, and that the	8
current performance of the resort was a real concern. 	He also	9
credibly testified that the approval here could be extended	10
out, so as to preserve the debtors' options and this valuable	11
right, while not committing to going forward with any	12
expansion. 	He and other witnesses noted that the debtors have	13
actually had a right to expand a smaller number of rooms on the	14
same property for some time and have not proceeded to go	15
forward with that expansion.	16
In sum, the debtors' mere consideration of expansion	17
is insufficient to entitle Hilton to damages here. 	See, e.g.,	18
Greenwich S.F., LLC v. Wong, 118 Cal. Rptr. 3d 531, 553 (Cal.	19
Ct. App. 2010); that case concluding that:	20
"The existence of plans for development does not	21
supply substantial evidence that the development is	22
reasonably certain to be built, much less that it is	23
reasonably certain to produce profits."	24
And that any reliance on a real estate project that	25
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may not occur in order to claim lost profits is "inherently	1
uncertain, contingent, unforeseeable, and speculative."	2
See also Vestar Development II, LLC v. General	3
Dynamics Corp., 249 F.3d 958, 962 (9th Cir. 2001); that case	4
holding that there is no way to evaluate, other than through	5
speculation, the profits of a prospective land purchaser on a	6
shopping center it would have built, had the purchaser been	7
permitted to purchase the parcel of land.	8
The Court also notes that Mr. Cline's damages	9
calculation as to the Grand Wailea expansion is somewhat	10
defective because it fails to account for the fact that such	11
expansion would negatively impact the Grand Wailea's	12
performance. 	It would do so by causing considerable disruption	13
to the resort for the period during which construction was	14
underway, and could result in potential lost business, required	15
discounting, and loss of good will among affected guests. 	The	16
debtors anticipate that the adverse effect on revenue and	17
earnings could last as long as two years.	18
Relatedly, the Court notes the evidence at trial that	19
group bookings typically have a provision that permits them to	20
cancel their reservation if there's ongoing construction, and	21
that such group bookings are crucial to the Grand Wailea's	22
economic success.	23
That concludes the Court's rulings on the motion to	24
estimate damages from rejection of these three management	25
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agreements. 	Again, as I noted earlier, it's my normal	1
preference to provide a written decision to the parties, but	2
debtors explained the need for a quick resolution of this	3
dispute and requested a decision, if at all possible, by August	4
1st, 2012, which is tomorrow. 	The need for such an expedited	5
decision relates to the existing deadlines for an exit strategy	6
in this Chapter 11 case, either by plan or sale or some	7
combination of both. 	And those deadlines for an exit strategy	8
were the result of hotly contested hearings on exclusivity in	9
this case, a dispute that was resolved by agreement of the	10
parties on the timing for an exit strategy. 	And so I	11
understand the quandary faced by the debtors; and therefore	12
prepared this bench ruling.	13
However, this being a bench ruling and transcription	14
being what it is, I plan to review the transcript to ensure	15
that it accurately reflects my ruling; and therefore reserve	16
the right to amend it accordingly. 	So I'd ask the debtors to	17
order the transcript on an expedited basis, and I'll take a	18
look at it. 	And I also request that the debtors prepare an	19
order memorializing my ruling, and obviously consult with	20
Hilton's counsel on the appropriate language to do so.	21
So that didn't take quite an hour and a half; it was a	22
little shorter than my estimate, but that concludes my business	23
for the day.	24
Is there anything that any party needs to raise?	25
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MR. LEON: 	No. 	I just wanted to take the opportunity	1
to once again thank Your Honor and your staff for accommodating	2
the parties, our schedule, and in particular the debtors' short	3
time constraints. 	It's very much appreciated on all sides.	4
And we also appreciate Your Honor's attention to this matter.	5
THE COURT: 	Absolutely.	6
Mr. Neff, is there anything you need to raise at this	7
time?	8
MR. NEFF: 	Your Honor, did you want the parties to	9
attempt to come up and try to quantify what the amount is?	10
THE COURT: 	Well, that actually was going to be the	11
next thing I was going to mention. 	If you noted, there is no	12
ultimate bottom-line quantification. 	That's because there are	13
many components to this that I was trying to get right, and I	14
was going to leave you all to do the math, particularly as to	15
the discount rate.	16
So yes, I think, it would be the appropriate subject	17
of discussion among the parties, in terms of memorializing the	18
ruling in an order.	19
MR. NEFF: 	Very good.	20
THE COURT: 	All right. 	Thank you.	21
Anything else? 	All right.	22
MR. LEON: 	Nothing for debtors.	23
THE COURT: 	Thank you. 	Have a good evening.	24
MR. LEON: 	Thank you, Your Honor. 	You, too.	25
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MR. NEFF: 	Thank you, Judge.	1
(Proceedings concluded at 5:15 p.m.)	2
*****	3
4
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CERTIFICATION	1
I certify that the foregoing is a correct transcript	2
from the electronic sound recording of the proceedings in the	3
above-entitled matter.	4
5
6
7
S/ Coleen Rand 	August 1, 2012	8
Coleen Rand, AAERT Cert. No. 341 	DATE	9
10
Certified Court Transcriptionist	11
12
AudioEdge Transcription, LLC	13
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